Double Taxation Of Payments Angers Disabled Veterans

Military Update

April 05, 1996|By TOM PHILPOTT Guest Columnist

``I wouldn't fight for this country again,'' says Isaac Tillman of Sherwood, Ark. ``You lay your life on the line two or three times. Why? For a government that don't respect you, don't respect anything you've done.''

Harsh words from a former chief warrant officer who served 17 years' active duty, 11 more in the Reserves. But Tillman and thousands of other veterans forced or enticed from service during the drawdown say the government is cheating each of them out of thousands of dollars.

The mischief results from a quirky combination of tax and veteran pay laws that penalizes disabled vets by, in effect, doubling the tax burden on their separation pay or exit bonuses. Those receiving such pays who later qualify for a disability rating face a tax not only on the exit bonus but on an equal amount of what should be tax-free disability compensation.

Roughly 22,000 veterans have suffered the penalty so far - or about 16 percent of all careerists enticed or pushed from service during the drawdown. That figure could climb to 31,000 by 1999. Most of those affected have accepted an exit bonus, either the lump-sum Special Separation Benefit or a limited annuity called the Voluntary Separation Incentive. But a few thousand have been or will be forced from active duty, and thus receive the less generous involuntary separation pay.

The veterans aren't stung until they apply for disability compensation from the Department of Veterans Affairs. That's when they first learn the tax consequences of combining the two pays. Tillman's case illustrates the situation.

In January 1993, while still three years short of retirement and awaiting promotion to CWO-4, Tillman was forced from active duty. Separation pay of $52,800 softened the blow but Tillman got only $43,000 after taxes. He used the money to pay his debts and contribute to his sons' college education.

But Tillman didn't leave service as healthy as he entered. In 1966, while on night patrol in Vietnam, he fell, injuring a knee and his back. The knee required three operations and awaits a fourth. Tillman reinjured his back in 1991 in Saudi Arabia while carrying 80-pound shells as an ammunition officer during Operation Desert Storm.

After separation, Tillman applied for disability retirement. The VA rated him 60 percent disabled and set his tax-free compensation at $596 a month. There was a catch however - one familiar to disabled retirees. Federal law prohibits ``concurrent receipt'' of both VA disability and service retirement or, it turns out, separation pay. Congress repeatedly has refused to lift the concurrent receipt ban even for 100-percent disabled retirees.

Tillman learned of this for the first time in February 1993. VA said his disability pay would not begin until it had withheld an amount equal to his separation pay. At first Tillman assumed this meant $43,000; he was wrong. By law, VA must offset the entire separation benefit - $52,822 - even though Tillman never saw the first $9000 that went for taxes. So that $9000, in effect, will cost Tillman another $9000 in disability pay. Put another way, the original $52,800 actually is worth only about $34,000.

Tillman has not received a VA check since leaving service more than three years ago and won't see one for another four-and-a-half years. ``Day before yesterday,'' he said, ``I still owed them $33,062.80.''

More troubling for Tillman is he can't find a job, despite earning a college degree in human resource management since leaving service. ``When you're a 53-year-old vet with back trouble, nobody's going to hire you,'' he said. If his wife, a nurse, didn't work, he added, ``we'd have already filed for bankruptcy.''

The Clinton administration says it's sympathetic but won't support legislation drafted by the Pentagon to correct the problem. The hang-up: eliminating double taxation for disabled vets involves an increase in entitlement spending. That's prohibited under budget deficit-reduction rules, called ``pay-go,'' unless an equal cut is made to another federal program. That cut, if the change were made retroactive to December 1991 when exit bonuses began, could be as much as $150 million.

Sen. James M. Jeffords (R-Vt.), a member of the Senate Veterans Affairs Committee, plans the first move in Congress toward ending the inequity. To avoid tangling with the tax code, he will offer a simple amendment to the VA authorization bill to lower the required offset of disability pay to 75 percent of a veteran's separation bonus. The protected 25 percent roughly equates to taxes withheld at the time exit bonuses are paid to departing members. Jeffords change would be retroactive to exit bonuses paid since Dec. 5, 1991.

``Hopefully we'll see action on it this summer,'' said a Jeffords aide. ``The big question we still have is where the extra money will come from.''